Computing the Nominal Cost of Trade Credit
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A certain firm grants trade credit with terms of 2/10, net 30.
What is the nominal cost of trade credit to a customer who pays on the due date? Set calculator to four decimal places to obtain the percentage answer to two decimal places
What is the nominal cost of trade credit to the customer above who stretches the payables to 45 days?
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Solution Summary
This solution illustrates how to compute the nominal cost of trade credit to a customer who pays on time and one who stretches their payments.
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You did not specify whether your book uses a 360-day year or a 365-day year, so I'll solve it for both:
365-day year:
Nominal cost of trade credit = (Discount percentage/(1-discount percentage))*(365/(Days outstanding - discount period))
Nominal cost of trade credit = (.02/(1-.02))*(365/(30-10))
Nominal cost of ...
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